1984 (7) TMI 409 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 58,46,535.
2. Validity and legality of the assessment.
3. Disallowance of surtax liability and expenses under section 40A(5) of the Income-tax Act, 1961.

Detailed Analysis:

1. Addition of Rs. 58,46,535:
The assessee-company, engaged in the manufacture of tungsten carbide products, adopted the Last In First Out (LIFO) method for valuing closing stock, resulting in a reduction of Rs. 58,46,535 in the closing stock valuation compared to the previous method. The IAC (assessing officer) rejected the LIFO method, considering it not bona fide, and added Rs. 58,46,535 to the income. The Commissioner (Appeals) upheld this addition, noting that the change was not justified by the period of production or inflation in raw material costs. The Tribunal, after visiting the factory and examining the manufacturing process, found the LIFO method more realistic due to the long production cycle and rising raw material costs. The Tribunal held that the change in method was bona fide and necessary to reflect true profits, thus deleting the addition.

2. Validity and Legality of the Assessment:
The assessee challenged the jurisdiction of the IAC to make the assessment, arguing that the IAC should have followed the draft assessment procedure under section 144B. The Commissioner (Appeals) held that the IAC had jurisdiction under sections 125, 125(2)(a)(i), 144B, and 153. The Tribunal agreed with the Commissioner (Appeals), noting that the IAC had concurrent jurisdiction and the assessment was validly made. The Tribunal emphasized that section 144B has overriding power, and the IAC was justified in making the assessment.

3. Disallowance of Surtax Liability and Expenses under Section 40A(5):
The Commissioner (Appeals) disallowed the surtax liability, relying on the Special Bench decision in Amar Dye-Chem. Ltd. v. ITO, which held that surtax liability is not a business expenditure allowable under section 37 or as a loss under section 28. The Tribunal upheld this disallowance, agreeing with the Commissioner (Appeals). Regarding the superannuation fund contribution, the Tribunal allowed the entire contribution of Rs. 89,507, following the Bombay Bench decision in Mahendra & Mahendra Ltd., which held the CBDT circular ultra vires. The Tribunal also allowed a reduction of Rs. 28,750 in respect of remuneration to Mahavir Prasad, considering it a business expenditure.

Conclusion:
The Tribunal partly allowed the assessee's appeal, deleting the addition of Rs. 58,46,535 and allowing the entire superannuation fund contribution. However, it upheld the disallowance of surtax liability and confirmed the validity of the assessment made by the IAC.